In O’Grady v. Merchant Exchange Productions, Inc., the California Court of Appeals held that a mandatory service charge could potentially be found to be a gratuity that must be distributed to service employees.  The issue in the case is whether a “service charge” can be a “gratuity” that Labor Code section 351 requires to be distributed, only to non-managerial employees actually serving customers.

Plaintiff, Lauren O’Grady, is a banquet server and bartender at the Julia Morgan Ballroom in San Francisco, which is operated by defendant Merchant Exchange Productions.  Plaintiff brought this class action alleging that her and the other non-managerial service employees were entitled to the 21 percent “service charge” added to every banquet bill.  Plaintiff alleged that the service charge constituted a gratuity that should be distributed to the non-managerial service employees pursuant to section 351.

The complaint alleged that the way the service charge was presented to customers “ was reasonable for [the customers] to have believed they were gratuities to be paid to the service staff.  Indeed, because of the way these charges are depicted to customers, and the custom in the food and beverage industry that gratuities in the range of 18-22% are paid for food and beverage service, customers have paid these charges reasonably believing they were to be remitted to the service staff.”  Plaintiff alleged causes of action under the Unfair Competition Law (Business & Professions Code Section 17200), intentional interference with advantageous relations, breach of implied contract, and unjust enrichment.

1. Labor Code section 350 and 351 protects gratuities as property of the employee.

The court explained that tips are protected under California law, and “[t]he Legislature wanted to protect employees from employers who used their positions to unfairly command a share of the employee’s tip.”  (Chau v. Starbucks Corp., 174 Cal.App.4th 692, 696, 699 [“section 351 was enacted to prevent an employer from pressuring an employee to give the employer tips left for the employee.”].)  Section 350 defines “gratuity” to “include any tip, gratuity, money or part thereof that has been paid or given to or left to an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron.”

Section 351 provides that “No employer or agent shall collect, take or receive any gratuity or part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as part of the wages due the employee from the employer.”

2. The Court held that the term “service charge” can have different meanings.

The court also explained that the term “service charge” can have many different meanings, and “simply calling something a ‘service charge’ hardly ever explains what it is – or why it is being imposed.”  Therefore, the court held that at the early stage in this case, plaintiff had at least plead enough facts and a potential theory for recovery to continue with the lawsuit and avoid having it dismissed at this stage.

3. Prior holdings in Searle v. Wyndham International and Garcia v. Four Points Sheraton LAX.

Defendant argued that two cases, Searle v. Wyndham Internat. (2002) 102 Cal.App.4th 1327 and Garcia v. Four Points Sheraton LAX (2010) 188 Cal.App.4th 364, established a mandatory service charge which is automatically added to a customer’s bill and which a customer is required to pay is not a gratuity as a matter of law.

In Searle, a San Diego hotel charged a 17 percent service charge to every room service order, which was given to the server.  A customer sued complaining that the charge was deceptive because the guests were not informed that this service charge was given to the employee, and there was an additional line of the receipt for a tip.  The court in Searle held that this was not a deceptive practice.  Garcia involved a city ordinance for hotels near LAX “that in plain effect directed certain hotels to treat their mandatory service charges as owed ‘to workers who render the services for which the charges have been collected.’”  (Garcia, supra, 188 Cal.App.4th 364, 370.)  Both of these cases contain language that because service charges are mandatory, the employer can do what it wants to with the service charge.  Indeed, Garcia also clearly sets forth that “[a] gratuity is not a service charge…Thus, a service charge by definition is not a gratuity.  The Legislature has made clear that amounts due for services (which include service charges) are not gratuities.”  (Garcia, 188 Cal.App.4th 364, 377.)

4. The Court distinguished Searle and Garcia from the facts in this case.

In this case, the court distinguished the Searle and Garcia cases in finding that “[n]either Searle nor Garcia involved what we have here—an employee who alleges that what the ballroom customer meant for employees to have is being kept by the employer.”  The court ultimately held that “[n]either, or both together, should be read, as defendant does, as categorially establishing that what may be called a ‘service charge’ by an employer can never be a gratuity.”

The Court noted that in addition to private agreements (as was the case in Searle) or by legislative command (as in Garcia), plaintiff here is alleging that custom in the hospitality industry is to treat amounts designated as “service charges” as gratuities for employee.  The court stated, “In other words, custom or usage can serve as a common law augmentation of section 350 and 351.”

The court held that plaintiff’s theory that a mandatory service charge could potentially be considered a gratuity by the customer, and therefore property of the server, not the employer, could proceed given the uncertainty of what is meant when a customer pays a “service charge.”

5. California employers should clearly notify customers and employees about mandatory service charges.

Based on the holding in O’Grady, California employers should review their descriptions of mandatory service charges, and if the employer wishes to retain these amounts and does not distribute them to the service employees, this must be made clear to the customers and employees.  This can be done through various notices (such as on contracts with customers, menus, and receipts) that the mandatory service charge is not a gratuity or a tip that the server receives, but it is an amount retained by the company.

Being named as a defendant in a class action or Private Attorneys General Act (PAGA) lawsuit can be overwhelming, especially for a growing company. However, with planning, a company can minimize the impact of litigation on its existing operations and put forth the best defense. Here are five steps a company can take as part of this planning process, upon being notified of an existing lawsuit.

1. Contact employment counsel.
A lawyer who has experience in employment law and class actions should be contacted as soon as possible. There are certain deadlines that begin to run when a lawsuit is filed, and any delay could adversely affect the company’s defense. If the company does not know of an employment lawyer, a good start is to reach out to trusted advisors for recommendations, such as the company’s corporate lawyer or accountant. Wage and hour litigation, especially in California, is very unique, and it is recommended that the company utilize a lawyer that has experience in this area.

2. Obtain arbitration agreement (if any) signed by plaintiff, and plaintiff’s personnel file and time records.
If the company has implemented an arbitration agreement, it will be important to determine if the plaintiff has signed it, and if it bars the plaintiff from bringing a class and representative action. If there is a binding arbitration agreement in place, a motion to compel arbitration will likely be one of the first motions filed with the court.

In addition, the personnel file for the named plaintiff will need to be produced at some point in the case, and it should be provided to counsel as soon as possible.  Also, the information in the personnel file will document any performance issues or other possible defenses the company has against the plaintiff’s allegations.

3. Review allegations with counsel to see if the safe harbor provision of the Private Attorney General Act (PAGA) could apply.
With the advice of counsel, there should be a review of both the allegations in the complaint, and if the plaintiff is seeking damages under PAGA, also the PAGA notice sent to the Labor Workforce & Development Agency (“LWDA”). PAGA provides the employer a short window of time (33 days from receiving the PAGA notice) to “cure” any alleged violations. If the employer cures the problems within the time period, the plaintiff cannot recover penalties under PAGA. Whether or not any items need to be cured, and the process for utilizing this safe harbor, should be reviewed closely with counsel.

4. Begin constructing a list of all employees who have worked in similar positions as the plaintiff during the last four years (which is likely the statute of limitations).
In California, the statute of limitations for most wage and hour class actions is four years from the date the complaint is filed. Therefore, the employees who have worked in the same or similar positions as the plaintiff will likely be the group of employees the plaintiff is seeking to represent in the class action. It is important to know how many of these employees there are. For example, if there are too few this could be a defense to class certification.

5. Gather employee handbooks and policies that were in effect during the last four years.
The litigation will likely revolve around what policies the company had in place, and whether the policies were legally compliant. The company’s counsel will have to review these policies and handbooks.

How to conduct a termination is not covered in management class, or any class for that reason.  Yet the termination process is one of the more common business decisions that will receive the most scrutiny and is likely the most legally challenged decisions in the workplace.  In addition, terminations trigger immediate legal obligations that the company must be ready to deal with on a moment’s notice.  Just as companies focus on the hiring process to ensure the best employees are hired, the same attention needs to be given to the termination process to reduce potential liability.

1. Do not sugar coat the reasons for termination.

Document performance as you see it.  If the termination was for cause – document that it is for cause – don’t take the easy route out and say that the employee was laid off.  It is important to document any for cause termination (i.e. for poor performance, theft, etc.…) in order to defend against potential litigation.  A company does not want to be in the position of initially providing the reason for termination as a layoff, but then if litigation is initiated attempting to explain that the true reason was for the employee’s poor performance.  This will appear as if the company is changing the reason for the termination, and will affect the company’s credibility regarding why the employee was terminated.

2. Respect the employee during the termination process.

I do not have anything scientific here, but I’m a true believer in good bedside manner.  Most employees might not like the termination, but probably will understand the decision if they have been given proper performance reviews leading up to a termination and were treated with respect during the process.

3. If offering severance, obtain a release of claims from the employee.

If a company pays severance to the employee, it should obtain a release in exchange for the payment.  A release can be a simple document, sometimes a page or two, if there is not any anticipated litigation.  While offering an employee some severance pay may cost the company money in the short-term, but doing so could save a lot of time and money in the long run.  If done properly, an employee’s acceptance of a severance agreement waives any and all claims against the company.  Employers should be careful to consult legal counsel as what terms can be included in severance agreements.

For example, beginning January 1, 2020, employer may not include a no re-hire provision in the severance agreement.  AB 749 prohibits and invalidates any provisions in settlement agreements entered into on or after January 1, 2020 that prevent workers from obtaining future employment with the settling employer or its affiliated companies.  More information about AB 749 can be read in my prior post here.

4. Documentation.

  • Keep payroll and time records for at least four years on a rolling basis (statute of limitations for many wage claims can extend back four years).
  • Keep personnel files for at least three years after termination.  Employers are required to keep personnel files for three years under the law, but it may be advisable to retain the files longer in order to be able to defend other claims with longer statutes of limitations, such as wage claims than can extend back four years.
  • Document paid sick leave and keep these records for at least one year, or longer.  As you may recall under California’s paid sick leave requirements effective in 2015, if an employee leaves employment and is rehired by the employer within one year, previously accrued and unused paid sick days must be reinstated.  The employee is entitled to the previously accrued and unused paid sick days in addition to accruing paid sick days upon rehiring.
  • If litigation is expected, employers should ensure documents and files are retained and kept safe until the litigation is resolved.

5. Develop a checklist to follow for your company.

I believe in checklists in order to avoid missing simple items during a termination and reducing liability.  Also, the process of thinking through the steps of a termination is helpful to do when there is no pressure, and time can be taken to ensure that all aspects are addressed.  A checklist is also helpful for organizations to ensure their managers are following all of the legal and organizational requirements of a termination.  For some of my considerations to start developing a checklist, see my prior post here.

With new legal requirements facing California employers by January 1, 2020, this Friday’s Five focuses on five initial steps that employers can begin implementing now:

1. Minimum Wage and Exempt Employees Salary Threshold: Adjust pay levels for increasing minimum wage and ensure exempt employees are paid minimum threshold salaries to qualify as exempt.

  • Effective January 1, 2020, the California minimum wage for employers with 25 employees or less will be $12.00/hour, and for employers with 26 employees or more will be $13.00/hour. Employers should be mindful that higher rates may be in effect in cities (such as San Francisco) or counties (such as Los Angeles) that have enacted their own minimum wage rates, and employers must comply with the highest applicable minimum wage.
  • To qualify as an exempt employee, the employee must be paid a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. With the state minimum wage increases on January 1, 2020, large employers (with 26 or more employees) must pay a salary of at least $54,080 annually, and small employers (25 or less employees) must pay a salary of at least $49,920 per year.

2. Lactation Accommodation: Implement policies and ensure space is available to provide lactation accommodations.

SB 142 requires employers to provide additional lactation accommodations for employees.  Employers need to review if any structural changes that must made in order to comply with the new requirements, and they should also develop and implement a lactation policy that meets the requirements under the new law.  In addition, employers should train managers to understand the employer’s obligations to provide these lactation accommodations and ensure managers understand employees are entitled to breaks to express breast milk.  Reasonable amounts of time in excess of the normal meal and rest breaks must be permitted.

3. Update arbitration agreements to ensure they comply with California law.

AB 51 prohibits employers from requiring any applicant for employment or any employee to waive any right, forum, or procedure under the California Fair Employment and Housing Act (FEHA) or the Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit. Therefore, employers must update any agreements to ensure they are voluntary to comply with AB 51.  Employers should also review the agreements to make sure they comply with California law, and continually work with counsel to ensure they are compliant.  For example, in Davis v. TWC Dealer Group, Inc., (10/30/19) the California appellate court found the employer’s arbitration agreement unenforceable on grounds that it was both procedurally (unequal bargaining power) and substantively (overly harsh or one-sided) unconscionable.

4. Severance Agreements and No-Rehire Provisions: Update severance agreements to comply with new prohibition on no-rehire provisions.

AB 749 prohibits and invalidates any provisions in settlement agreements entered into on or after January 1, 2020 that prevent workers from obtaining future employment with the settling employer or its affiliated companies.  More information about AB 749 can be read in my prior post.

5. Update handbooks and posters.

As a reminder, my firm will be hosting a seminar on the new employment legal developments for 2020 on November 21, 2019.  More information can be found here.

Fires are again affecting California and Los Angeles.  As of this morning, October 25, 2019, 50,000 people have been evacuated in northern Los Angeles County due to the Tick fire.  Given the evacuations and electrical grid shutdowns by Pacific Gas & Electric to prevent power lines from starting fires, employers need to understand their obligations regarding pay and leave issues during times of natural disasters.

1. Reporting time pay obligations

California law requires an employer to pay “reporting time pay” under the applicable Wage Order.  This requires that when an employee is required to report for work and does report, but is not put to work or is furnished less than half of the employee’s usual or scheduled day’s work, the employee shall be paid for half the usual or scheduled day’s work, but in no event for less than two (2) hours, nor more than four (4) hours, at the employee’s regular rate of pay, which cannot not be less than the minimum wage.

In addition, if an employee is required to report to work a second time in any one workday and is furnished less than two hours of work on the second reporting, he or she must be paid for two hours at his or her regular rate of pay.

California’s Labor Commissioner provides the following example:

[I]f an employee is scheduled to report to work for an eight-hour shift and only works for one hour, the employer is nonetheless obligated to pay the employee four hours of pay at his or her regular rate of pay (one for the hour worked, and three as reporting time pay). Only the one-hour actually worked, however, counts as actual hours worked.

Employers must remember, when an employee is scheduled to work, the minimum two-hour pay requirement applies only if the employee is furnished work for less than half the scheduled time.

2. Exceptions to the reporting time requirements – “Acts of God”

The Wage Orders provide that employers are not required to pay overtime pay during the following circumstances:

  1. When operations cannot begin or continue due to threats to employees or property, or when civil authorities recommend that work not begin or continue; or
  2. When public utilities fail to supply electricity, water, or gas, or there is a failure in the public utilities or sewer system; or
  3. When the interruption of work is caused by an Act of God or other cause not within the employer’s control, for example, an earthquake.

3. Time paid as reporting time pay does not trigger overtime pay

Reporting time pay for hours in excess of the actual hours worked is not counted as hours worked for purposes of determining overtime.

4. What if the employee voluntarily leaves work early?

Employers are not required to pay reporting time pay if the employee voluntarily leaves work early.  For example, if the employee must leave to tend to their property during a fire, becomes sick, or must attend to personal issues outside of work and leaves early, then the employer is not obligated to pay reporting time pay (however, this may trigger paid sick leave or other legal obligations for the employer).

5. Must an employer pay an employee to attend to safety issues, such as an evacuation of their home?

Generally, there is no legal obligation for employers to pay employees if the business is shut down because of an Act of God (see above), or if an employee needs time off because of an evacuation order or to protect their property.

However, if the employee is an exempt employee, generally, they must be paid their full weekly salary if they perform any work during the week.  There are some limited exceptions to this, but employers must approach this issue with caution.  Exempt employees must be paid their salary, and generally the only exception to this is if they perform no work for the entire workweek, and the reduction in pay for the week does not bring them under the salary threshold.

As for hourly, non-exempt employees, employers may permit employees to take any PTO or accrued vacation during times of disasters.  If the employee is sick or must attend to a family member who is sick as a result of the disaster, this time off would also likely trigger paid sick leave under state or local law.

California has finalized all new employment laws for 2020.  Most of the new employment laws are are effective on January 1, 2020.  In my prior post I wrote about a few of the new laws (click here to view), but now that the legislative year is closed, I wanted to cover five additional key employment laws that California employers need to understand and be aware of going into 2020:

AB 25 – Employees’ Personal Information Excluded From California Consumer Privacy Act Until January 1, 2021

This bill excludes employees and prospective employees from the “Consumer” definition under the California Consumer Privacy Act until January 1, 2021.  The law exempts any individuals “acting as a job applicant to, an employee of, owner of, director of, officer of, medical staff member of, or contractor of that business.”  Therefore, employers have one additional year to comply with the requirements of the CCPA pertaining to applicants’ and employees’ information.

AB 25 was passed to assist in clarifying some aspects of the CCPA.  The law was passed in 2018, and is meant to give “consumers” certain knowledge about what data companies are collecting about them, and the right to request that the data be deleted, in addition to other rights.  “Consumers” was defined so broadly, that it has encompassed job applicants and employees.

AB 749 – Ban on No-Rehire Provisions in Settlement Agreements

AB 749 prohibits and invalidates any provisions in settlement agreements entered into on or after January 1, 2020 that prevent workers from obtaining future employment with the settling employer or its affiliated companies.

The law applies to any employees who have filed a claim: (1) against the employer in court, (2) before an administrative agency, (3) in an alternative dispute resolution forum, or (4) through the employer’s internal complaint process.  Therefore, if the employee has complained internally, and a severance agreement is reached with the employee without any litigation being filed, the employer would still be restricted from placing a no-rehire provision in the severance agreement.

The law does not prohibit or otherwise restrict an employer from preventing an employee from obtaining future employment if the employer has made a good faith determination that the person engaged in sexual harassment or sexual assault.

SB 142 – Lactation Accommodation

SB 142 expands an employer’s duties and responsibilities in providing lactation accommodation to those employees who need to express breast milk.  This bill mandates employers to provide a lactation room or location, not a bathroom, that:

  1. Is in close proximity to the employee’s work area;
  2. Shielded from view;
  3. Free from intrusion while the employee is expressing milk;
  4. Safe, clean and free of hazardous materials;
  5. Contains a surface to place a breast pump and personal items;
  6. Contains a place to sit;
  7. Has access to electricity; and,
  8. The employer must provide access to a sink with running water and a refrigerator for storing milk in close proximity to the employee’s working space

Additionally, the bill requires employers to develop and implement a lactation policy.  Such lactation policy must include, among other things, a statement about an employee’s right to request lactation accommodation and a statement about an employee’s right to file a complaint with the Labor Commissioner for an employer’s failure to provide the accommodation.

The bill equates a denial of lactation break time or space to a violation of a rest period, thus subjecting the employer to a $100 penalty per violation.

Employers with 50 or fewer employees that demonstrate that this law would impose an undue hardship (such as being too difficult or expensive) may be exempted from SB 142’s requirements.

SB 188 – Hairstyle Discrimination

Known as the CROWN Act (Create a Respectful and Open Workplace for Natural Hair), SB 188 expands the Fair Employment and Housing Act’s definition of race to include traits historically associated with race, such as hair texture and protective hairstyles.  The bill defines “protective hairstyles” as “braids, locks, and twits.”  The law prohibits workplace dress code and grooming policies that prohibit natural hair, including afros, braids, twists and locks.

SB 707 – Arbitration Agreements Fees and Costs

SB 707 provides that an employer’s failure to pay costs and fees associated with an arbitration within 30 days of the due date would result in breach of the arbitration agreement, thereby waiving the right to compel arbitration.  The bill provides that the employee would, in turn, be able to withdraw the claim from arbitration and prosecute his or her claim in court.

Yesterday, October 10, 2019, Governor Newsom signed 15 new employment related bills.  The Governor has until October 13 to sign or veto all bills on his desk.  My firm will be hosting a seminar in November discussing all of the new laws facing California employers in 2020 and actions that employers need to take in response to these developments.  To receive information about the seminar, make sure you are subscribed to our newsletter (click here for registration).  Here are four of the most significant bills, and an overview of the other bills, all of which will have a powerful impact on employment practices moving forward:

1. AB 9, known as the Stop Harassment and Reporting Extension (SHARE) Act, extends the deadline to file harassment, discrimination, or civil rights-related claim under the Fair Employment and Housing Act.

Existing law prohibits any form of harassment based on a protected category, such as race, gender, sexual orientation, age, religion, disability and other categories protected under California law.  Currently, the law requires a person claiming to be aggrieved by alleged workplace harassment to file a verified complaint with the Department of Fair Employment and Housing (DFEH) within one year from the date of occurrence.  AB 9 extends that deadline to 3 years.

2. AB 51 – Places prohibitions on arbitration agreements

AB 51 prohibits employers from requiring any applicant for employment or any employee to waive any right, forum, or procedure under the California Fair Employment and Housing Act (FEHA) or the Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit.  AB 51 is California’s renewed attempt to outlaw the practice of employers requiring employees to submit to binding arbitration.  Whether AB 51 is preempted by the Federal Arbitration Act is something to be monitored closely.

3. SB 688 – Expands Labor Commissioner’s authority to pursue wage claims

SB 688 expands the enforcement abilities of the Labor Commissioner.  Previously, the Labor Commissioner could only enforce actions for violations alleging unpaid minimum wages.  SB 688 now provides the Labor Commissioner with authority to issue citations for violations of unpaid wages that were less than the wage set by contract in excess of minimum wage.

4. AB 673 – Permits employees to recover civil penalties for unpaid wages

AB 673 gives employees the right to recover civil penalties for unpaid wages.  These civil penalties were previously enforceable only through an action by the Labor Commissioner.  Now, the employee is entitled to recover $100 for each initial violation for failure to pay each employee, and for a “subsequent violation, or any willful or intentional violation” of $200 for each failure to pay.  Employers will also be liable for 25% of the amount unlawfully withheld for certain Labor Code violations.  AB 673 limits employee recovery to statutory penalties or civil penalties under the Private Attorney’s General Act (“PAGA”), but not both, for the same violation.

5. Other employment related bills signed by the Governor

Understandably, entrepreneurs’ main concerns are shipping great products and making sure they can meet the next payroll.  As your company grows, regardless of what industry you are in, tech, biotech, or a restaurant, it is critical that the founder devote some time and effort into ensuring employment law compliance.  Investors will demand this during the due diligence (as they do not want their money used for defending employment law claims), and employment litigation can be a costly and time-consuming event that could ruin a company’s chances of success early in the start-up process.  Below are five mistakes start-ups cannot afford to make.

1. Classifying all employees as independent contractors
To qualify as an independent contractor, the employer has the burden of proof to establish that the worker is actually an independent contractor and not an employee. California passed AB 5 that takes effect on January 1, 2020 and implements the ABC test to determine whether a worker can be classified as an independent contractor. AB 5’s primary focus was on the gig economy’s use of independent contractors, but all start-ups should take note and approach this issue with caution. In addition to owing unpaid minimum wages and potential unpaid overtime, the employer also faces steep penalties for misclassifying independent contractors.

2. Treating all employees as exempt employees and not paying overtime.
An employee cannot agree to work without being paid overtime unless they qualify as an exempt employee. To qualify as an exempt employee, generally, the employee must perform certain duties, and must be paid a certain threshold in wages (usually at least two times the equivalent pay of minimum wage based on a 40-hour week).

3. Not having a handbook and written policies.
Even if startup companies have no money, the Labor Code still applies. They still have to pay more than minimum wage, provide and record meal and rest breaks, issue wage notices to new employees, and otherwise comply with California law. A handbook, new hire packet, and standardized set of written policies is a good place to start.

4. Not providing a clear offer letter with at-will provisions and clear understanding of who owns social media accounts and passwords.
Companies should be providing a writing setting forth the employee’s compensation, stock option rights, at-will status, as well as who owns the rights to social media accounts and the passwords to access the accounts. It is much better to have this set out early in order to avoid costly litigation and disruption in your business later.

5. Not having the right employment law counsel.
Startup owners should have a relationship with an attorney that actually practices California employment law. Have an agreement with counsel that enables the company to ask quick questions as they arise – if your lawyer is invested in the relationship, quick calls often time are not billed. However, make this easier on your lawyer, do the work before you call, and just have the lawyer’s input to double check that the decision you have made, or the letter you drafted is good-to-go. Otherwise, calling your lawyer and asking him to draft the letter will take time (usually more time than the client could have done it in) and will increase the cost of legal services.

The California legislature set its sights on limiting employers’ use of independent contractors in the gig economy, and it will have a dramatic impact for all employers.  AB 5, which codifies the California Supreme Court’s ABC test for independent contractors as set forth in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018), was signed into law by Governor Newsom on September 18, 2019 and will become effective on January 1, 2020.  Here are five key issues California employers must understand about AB 5:

1. AB 5 codifies the California Supreme Court’s ruling in Dynamex.

The California Supreme Court ruled in Dynamex that in order for a worker to be properly classified as an independent contractor, the company must establish that the worker meets the ABC test:

  • Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
  • Part B: Does the worker perform work that is outside the usual course of the hiring entity’s business?
  • Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

A detailed article about the ruling in Dynamex v. Superior Court can be read here.

2. By codifying Dynamex, the bill expands the reach of the ABC test.

The California Supreme Court’s ruling in Dynamex held that the new ABC test applied to California’s wage orders.  AB 5, in codifying the ruling, applies ABC test to workers not just for wage order purposes, but also under the California Labor Code and the Unemployment Insurance Code.

3. AB 5 does not apply to certain types of workers.

The bill exempts certain types of workers, such as certain investment advisers, workers providing licensed barber or cosmetology services, licensed physicians and surgeons, licensed attorneys, dentists, architects, engineers and accountants.  Because the bill carves out these professions from the bill, the nine-factor test set forth in Borello & Sons, Inc. v. Department of Industrial Relations will apply in determining whether a worker is either an independent contractor or an employee.

Of primary note, the bill does not exempt rideshare companies, such as Uber or Lyft.

4. There are steep penalties for the misclassification of a worker as an independent contractor.

In addition to Labor Code violations for items such as unpaid wages, missed meal and rest breaks, and overtime that would be available to a worker misclassified as an independent contractor, Labor Code section 226.8 also provides for significant civil penalties.  Labor Code section 226.8 provides that employers can be liable for civil penalties of $5,000 to $15,000 for each violation of “willful misclassification” of employees as independent contractors. In addition, if it is found that the employer has a pattern and practice of misclassifying independent contractors, the penalties can increase to a minimum of $10,000 to $25,000 per violation.

Labor Code section 226.8 imposes the penalties for a “willful misclassification,” which is defined as:

“Willful misclassification” means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.

5. AB 5 will impact the workforce as well as consumers in California.

Employees are provided additional Labor Code rights beyond those provided for independent contractors for items such as minimum wage, meal and rest breaks, and overtime pay.  However, independent contractors are permitted more control over their work schedules and how they carry out their duties, which many workers in the gig economy prefer.  If independent contractors are required to be reclassified as employees, companies will have more control over when and where the workers perform their duties.  Also, the additional costs associated with having workers treated as employees, such as providing paid sick leave benefits as required by the state and some local cities, will ultimately have to be passed on to consumers.  In addition, it is putting pressure on many industries to bring automation into the workforce quicker.

I was fortunate to speak on a panel earlier this week on the “State of the Union: Exploring 2019 Labor Challenges” at the Financial Leadership Exchange for foodservice CFO’s and financial executives in Sun Valley, ID.  As part of the exchange, and the panel I was on, there were a few overriding issues that were a common theme throughout the conference.  This Friday’s Five covers the top five themes related to labor and employment that were consistently discussed during the exchange:

1. Employment costs are a concern.

One of the top three concerns for operators, if not the first concern, is the increasing employment costs across the nation.  This increase in cost is not only from increasing minimum wages, but also from scheduling mandates (see below), paid sick leave and other forms of paid time off, joint employer issues, employee training mandates, and other regulations directed at the hospitality industry.  On top of these issues, employers face threats of employment related litigation and the costs associated with defending against these claims.

2. California’s new law, AB 5, limiting use of independent contractors likely has an impact on restaurants.

While the hospitality industry is still trying to understand how third-party delivery systems such as Postmates, DoorDash, and Uber Eats fit into the business model and if these types of companies are sustainable long term, they are a major part of the landscape for now.  California’s AB 5, signed by Governor Newsom on September 18, 2019, codifies the California Supreme Court’s ruling in Dynamex Operations West, Inc. v. Superior Court, and is directed at restricting companies from classifying workers as independent contractors in the gig economy.

As I was quoted in Nation’s Restaurant News last week, the costs for food delivery through these platforms will have to increase if the drivers are classified as employees, and ultimately, the consumer will have to pay more for this service.  As noted in the article by Alex Canter, of Canter’s Deli, the delivery services will likely look towards automation to make deliveries in the future.

3. Scheduling mandates, often called fair work week or predictive scheduling, has many unintended consequences for the hospitality industry.

While not a law in California, other states and local cities have passed scheduling mandates that require employers to set schedules for employees well in advance, and if the employer changes the schedules within a certain time frame, the employer must pay a penalty for the change.  There has been proposed legislation in California for this type of law, but as of 2019, none of these bills have passed.  For example, in 2016, California’s legislature drafted SB 878 that proposed to require retail establishments, grocery stores, and restaurants to set employees schedules 28 days in advance, and impose penalties on the employer if the schedule is modified by the employer.

4. Software to manage a workforce is critical.

Automation such as driverless cars, drones, and robots as servers may still be a thing for the future (but not that far-off as noted below), but employers are quickly realizing that software to manage routine workforce matters are available and the industry leaders are already utilizing these services.  Items such as onboarding employees, scanning employment files, having platforms that all employees can effectively communicate across electronically, and employee training can all be done easier and more efficiently with the use of software.

5. Automation is a potential solution.

As mentioned above, automation and adapting to new technology is becoming essential in being able to remain competitive going forward.  While it may sound improbable, companies like Miso Robotics are developing technology that many people only recently thought would be unattainable.  For example, Miso Robotics created Flippy, a robot that can work a grill or fryer.  It will be interesting to see how quickly automation technology develops.

(Photo Credit: Miso Robotics)